Ariad Pharmaceuticals Still Might Have Upside

Stock run-up fueled by ponatinib optimism could go past 2011

Is there still room for investors to make money on Ariad Pharmaceuticals (NASDAQ:ARIA)?

At least one heavy hitter thinks so. The most recent SEC 13-F filing for the September 2011 quarter shows New York-based hedge fund Baker Bros. Advisors LLC upped its position in the Cambridge, Mass.-based biotech company, according to Seeking Alpha.

Known for finding numerous biotech winners, the hedge fund added to its $9 million position by sinking another $6 million into Ariad. Once again, the brothers who mastermind Baker Bros., Julian and Felix, proved — at least in the short term — that they have know what they’re doing. In the past three months, Ariad shares are up more than 11% and have jumped an astounding 120% in the past 12 months.

That’s a great deal of support for a company that is 20 years old, isn’t making money, doesn’t have a product on the market and had only about $86 million in cash at the end of the third quarter. Yet analysts seem to like the stock, too, giving it a mean recommendation of 1.6 (with 1 being a strong buy and 5 being a sell). Moreover, Barclays recently initiated coverage of Ariad with an overweight recommendation. Further, analysts peg the company’s median target price near $16, a more than 37% premium to its current price of $11.67.

Investors better hope this isn’t a case of counting chickens before they’re hatched. It appears they’re banking heavily on approval of Ariad’s leukemia treatment ponatinib in 2013. The drug garnered rave reviews at the recent American Society of Hematology meeting in San Diego, with impressive results treating study patients with chronic myelogeneous leukemia, or CML.

Early data from the pivotal trial showed ponatinib looks very active in patients who failed two approved drugs in the same class, Bcr-Abl inhibitors. Ponatinib achieved a response in almost half of them, according to Seeking Alpha, which called the drug “one of the most attractive assets in the biotech industry.”

The most important finding for the drug’s near-term potential is the 65% response rate in a subset of patients with a mutation that is resistant to the three approved Bcr-Abl inhibitors. This advantage could lead to the FDA granting the drug accelerated approval. If given the OK, “ponatinib will have virtually no competition in this segment,” added Seeking Alpha.

Sales of the drug could reach $250 million in 2015 and could be in the $1 billion range a few years later if ponatinib can gain approval as a first-line treatment.

CML is an uncommon type of cancer of the blood cells. The term “chronic” in chronic myelogenous leukemia indicates that this cancer tends to progress slower than acute forms of leukemia, according to the Mayo Clinic. It typically affects older adults and rarely occurs in children, though it can occur at any age.

Ariad also might have an ace in the hole with its non-small-cell lung cancer drug, AP26113, which in preclinical testing was shown to be 10 to 20 times more potent than crizotinib, Pfizer‘s (NYSE:PFE) drug in the same class, the company said in a news release. A Phase I/II trial of AP26113 began recently.